Chapter 15: Q20E (page 842)

Micatin, Inc.’s comparative income statement follows. The 2017 data are given as needed.

MICATIN INC.
Comparative Income Statement
Years Ended December 31, 2019, and 2018
Dollars in thousands
2019
2018
2017
Net Sales Revenue
$ 181,000
$ 160,000
Cost of Goods Sold
93,500
86,500
Selling and Administrative Expenses
45,000
40,500
Interest Expense
8,000
12,000
Income Tax Expense
11,000
10,500
Net Income
$ 23,500
$ 10,500
Additional data:
Total Assets
$ 209,000
$ 187,000
$ 167,000
Common Stockholders’ Equity
96,000
91,500
80,500
Preferred Dividends
2,000
2,000
0
Common Shares Outstanding During the Year
15,000
15,000
10,000
Requirements
Calculate the profit margin ratio for 2019 and 2018.
Calculate the rate of return on total assets for 2019 and 2018.
Calculate the asset turnover ratio for 2019 and 2018.
Calculate the rate of return on common stockholders’ equity for 2019 and 2018.
Calculate the earnings per share for 2019 and 2018.
Calculate the 2019 dividend payout on common stock. Assume dividends per share for common stock are equal to $1.13 per share.
Did the company’s operating performance improve or deteriorate during 2019?

Short Answer

Expert verified

S. no.	Ratio	2019	2018
1	Profit margin ratio	13.0%	6.6%
2	Return on total assets	15.9%	12.7%
3	Asset turnover ratio	0.91times	0.90 times
4	Return on common stockholders’ equity	22.9%	9.9%
5	Earnings per share	$1.43/share	$0.68/share
6	The dividend payout on common stock for 2019 is 19.00%
7	Yes, the company’s operating performance improve

Step by step solution

Meaning of Profit margin ratio

The profit margin ratio shows the rate of income that remains after all business expenses have been paid. Formula to calculate the profit margin ratio is as follows:

$Profit margin ratio = \frac{Net income}{Net sales}$

(1) Calculate the profit margin ratio for 2019 and 2018

2019

$\begin{matrix} Profit margin ratio = \frac{Net income}{Net sales} \\ = \frac{$ 23, 500}{$ 181, 000} \\ = 0.130 or 13.0 % \end{matrix}$

2018

$\begin{matrix} Profit margin ratio = \frac{Net income}{Net sales} \\ = \frac{$ 10, 500}{$ 160, 000} \\ = 0.066 or 6.6 % \end{matrix}$

(2) Calculate the rate of return on total assets for 2019 and 2018.

2019

$\begin{matrix} Rate of return on total asset = \frac{Net income + Interest expense}{Average total assets} \\ = \frac{$ 23, 500 + $ 8, 000}{(\frac{$ 209, 000 + $ 187, 000}{2})} \\ = 0 .159 or 15 .9 % \end{matrix}$

2018

$\begin{matrix} Rate of return on total asset = \frac{Net income + Interest expense}{Average total assets} \\ = \frac{$ 10, 500 + $ 12, 000}{(\frac{$ 187, 000 + $ 167, 000}{2})} \\ = 0 .127 or 12 .7 % \end{matrix}$

(3) Calculate the asset turnover ratio for 2019 and 2018.

2019

$\begin{matrix} Asset turnover ratio = \frac{Net sales revenue}{Average total asset} \\ = \frac{$ 181, 000}{(\frac{$ 209, 000 + $ 187, 000}{2})} \\ = 0 .91 times \end{matrix}$

2018

$\begin{matrix} Asset turnover ratio = \frac{Net sales revenue}{Average total asset} \\ = \frac{$ 160, 000}{(\frac{$ 187, 000 + $ 167, 000}{2})} \\ = 0 .90 times \end{matrix}$

(4) Calculate the rate of return on common stockholders’ equity

2019

$\begin{matrix} Rate of return on common stockholder equity = \frac{Net income - Preferred dividend}{Average common stockholder's equity} \\ = \frac{$ 23, 500 - $ 2, 000}{(\frac{$ 96, 000 + $ 91, 500}{2})} \\ = 0 .229 or 22 .9 % \end{matrix}$

2018

$\begin{matrix} Rate of return on common stockholder equity = \frac{Net income - Preferred dividend}{Average common stockholder's equity} \\ = \frac{$ 10, 500 - $ 2, 000}{(\frac{$ 91, 500 + $ 80, 500}{2})} \\ = 0 .090 or 9 .9 % \end{matrix}$

(5) Calculate the earnings per share for 2019 and 2018

2019

$\begin{matrix} Earning per share = \frac{Net income - Preferred dividend}{Weighted average number of common} \\ = \frac{$ 23, 500 - $ 2, 000}{15, 000 shares} \\ = $ 1 .43 / share \end{matrix}$

2018

$\begin{matrix} Earning per share = \frac{Net income - Preferred dividend}{Weighted average number of common} \\ = \frac{$ 10, 500 - $ 2, 000}{(\frac{15, 000 shares + 10, 000 sahres}{2})} \\ = $ 0 .68 / share \end{matrix}$

(6) Calculate the 2019 dividend pay-out on common stock

$\begin{matrix} Dividend payout = \frac{Annual dividend per share}{Earning per share} \\ = \frac{$ 1 .13 per share}{$ 1 .43 per share} \\ = 0 .790 or 79 .0 % \end{matrix}$

(7) Analysing the company’s performance

The company’s performance improved during 2019 based on an improvement in all ratios evaluated.

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	THE PADDLE COMPANY Comparative Financial Statements Years Ended December 31			RECREATIONAL LIFE VESTS Comparative Financial Statements Years Ended December 31
Income statement	2019	2018	2017	2019	2018	2017
Net sales revenue	\(430,489	\)425,410		\(410,570	\)383,870
Cost of goods sold	258,756	256,797		299,110	280,190
Gross profit	171,733	168,613		111,460	103,680
Operating expenses	153,880	151,922		78,290	70,830
Operating income	17,853	16,691		33,170	32,850
Interest expenses	865	788		2,780	2,980
Income before income tax	16,988	15,903		30,390	29,870
Income tax expenses	5,137	4,809		8,780	8,630
Net income	\(11,851	\)11,094		\(21,610	\)21,240
Balance sheet

Assets
Cash & Cash Equivalents	\(69,159	\)70,793		\(65,730	\)55,270
Accounts Receivable	44,798	44,452	\(44,104	39,810	38,650	\)36,460
Merchandise Inventory	79,919	66,341	76,363	68,500	65,230	59,930
Other Current Assets	15,494	16,264		24,450	37,630
Total Current Assets	209,370	197,850		198,490	196,780
Long-term Assets	89,834	90,776		116,760	116,270
Total Assets	\(299,204	\)288,626	\(276,482	\)315,250	$$313,050	\(310,640

Liabilities
Current Liabilities	\)69,554	\(60,232		\)90,810	\(90,010
Long-term Liabilities	31,682	29,936		96,310	105,890
Total Liabilities	101,236	90,168		187,120	195,900

Stockholders’ Equity
Common Stock	72,795	80,885		111,530	102,480
Retained Earnings	125,173	117,573		16,600	14,670
Total Stockholders’ Equity	197,968	198,458		128,130	117,150	103,840
Total Liabilities and Stockholder’s Equity	\)299,204	\(288,626		\)315,250	\(313,050

Other data
Market price per share	\)21.38	\(33.82		\)46.37	$51.64
Annual dividend per share	0.32	0.30		0.53	0.45
Weighted average number of shares outstanding	9,000	8,000		9,000	8,000

a. Current ratio	h. Profit margin ratio
b. Cash ratio	i. Asset turnover ratio
c. Inventory turnover	j. Rate of return on common stockholders’ equity
d. Accounts receivable turnover	k. Earnings per share
e. Gross profit percentage	l. Price/earnings ratio
f. Debt ratio	m. Dividend yield
g. Debt to equity ratio	n. Dividend payout

	2018	2017
Net Income	\(71,900	\)64,300
Dividends—Common	22,000	22,000
Dividends—Preferred	16,800	16,800
Total Stockholders’ Equity at Year-End (includes 95,000 shares of common stock)	770,000	610,000
Net Income	\( 71,900	\) 64,300
Market Price per Share of Common Stock	\( 16.50	\) 10.00

ABC ATHLETIC SUPPLY, INC. Five-Year Financial Summary (Partial; adapted)
(Dollar amounts in thousands except per share data)	2018	2017	2016	2015	2014	2013
Net Sales Revenue	\(250,000	\)216,000	\(191,000	\)161,000	\(134,000
Net Sales Revenue Increase	16%	13%	19%	20%	17%
Domestic Comparative Store Sales Increase	5%	6%	4%	7%	9%
Other Income—Net	2,110	1,840	1,760	1,690	1,330
Cost of Goods Sold	189,250	164,592	148,216	126,385	106,396
Selling and Administrative Expenses	41,210	36,330	31,620	27,440	22,540
Interest:
Interest Expense	(1,080)	(1,380)	(1,400)	(1,020)	(830)
Interest Income	125	165	155	235	190
Income Tax Expense	4,470	3,900	3,700	3,320	2,700
Net Income	16,225	11,803	7,979	4,760	3,054
Per Share of Common Stock:
Net Income	1.60	1.30	1.20	1.00	0.78
Dividends	0.40	0.38	0.34	0.30	0.26
Financial Position
Current Assets, Excluding Merchandise Inventory	\)30,700	\(27,200	\)26,700	\(24,400	\)21,500
Merchandise Inventory	24,500	22,600	21,700	19,000	17,500	$16,700
Property, Plant, and Equipment, Net	51,400	45,200	40,000	35,100	25,600
Total Assets	106,600	95,000	88,400	78,500	64,600
Current Liabilities	32,300	28,000	28,300	25,000	16,500
Long-term Debt	23,000	21,500	17,600	19,100	12,000
Stockholders’ Equity	51,300	45,500	42,500	34,400	36,100
Financial Ratios
Acid-Test Ratio	1.0	1.0	0.9	1.0	1.3
Rate of Return on Total Assets	17.2%	14.4%	11.2%	8.1%	7.1%
Rate of Return on Common Stockholders’ Equity	35.5%	26.%	20.8%	13.5%	13.0%

GARFIELD, INC Comparative Income Statement Years Ended December 31, 2018 and 2017
	2018	2017
Net sales revenue	\(461,000	\)424,000
Cost of goods sold	241,000	211,000
Gross profit	220,000	213,000
Operating expenses	137,000	135,000
Income from operations	83,000	78,000
Interest expenses	9,000	13,000
Income before taxes	74,000	65,000
Income tax expenses	18,000	24,000
Net income	\(56,000	\)41,000

Short Answer

Step by step solution

Meaning of Profit margin ratio

(1) Calculate the profit margin ratio for 2019 and 2018

(2) Calculate the rate of return on total assets for 2019 and 2018.

(3) Calculate the asset turnover ratio for 2019 and 2018.

(4) Calculate the rate of return on common stockholders’ equity

(5) Calculate the earnings per share for 2019 and 2018

(6) Calculate the 2019 dividend pay-out on common stock

(7) Analysing the company’s performance

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MICATIN INC. Comparative Income Statement Years Ended December 31, 2019, and 2018
Dollars in thousands	2019	2018	2017
Net Sales Revenue	\( 181,000	\) 160,000
Cost of Goods Sold	93,500	86,500
Selling and Administrative Expenses	45,000	40,500
Interest Expense	8,000	12,000
Income Tax Expense	11,000	10,500
Net Income	\( 23,500	\) 10,500

Additional data:
Total Assets	\( 209,000	\) 187,000	\( 167,000
Common Stockholders’ Equity	96,000	91,500	80,500
Preferred Dividends	2,000	2,000	0
Common Shares Outstanding During the Year	15,000	15,000	10,000